BioVectra deal shows Questcor’s faith in Acthar

If some of the more sceptical investors have by now realised that Questcor Pharmaceuticals’ expensive, ancient, off-patent, orphan disease drug Acthar is likely to end up a busted flush, at least the company itself has not lost faith.

Just take a look at Questcor’s move on Wednesday to buy Canada’s BioVectra, one of two suppliers that had manufactured Acthar for it on a contract basis. BioVectra’s price tag – C$50m ($50.7m) up front plus up to another C$50m over the next three years – reveals a lot about just how much revenue Questcor reckons its controversial drug will generate in the near term.

Analysts are remarkably bullish on Acthar, with consensus seeing a massive $806m in sales by 2018, according to EvaluatePharma. This is despite recent troubles around insurance, which have led to one major US insurer moving to cut coverage and state that Acthar was not “medically necessary” for most uses, prompting a Questcor share price collapse (Questcor’s Acthar fairy tale goes sour, September 20, 2012).

So it might come as something of a shock to learn that Questcor’s view of Acthar is more upbeat even that that.

A complex extraction

Acthar, an established drug decades off patent that Questcor had acquired 11 years ago for just $100,000, is derived from the complex extraction and purification of pigs' pituitary glands. BioVectra is Questcor’s sole supplier of the Acthar API, and the obvious reason for Questcor buying it out is the avoidance of future manufacturing payments.

It is obvious how much Questcor expected to have had to pay BioVectra to make splashing out between $50m and $100m stack up economically. Relating this to the company’s expectations for Acthar sales is harder, but it is possible.

Consider that over the first nine months of 2012 Questcor’s cost of goods amounted to $19m – roughly 5.6% of Acthar sales. In addition to fees to BioVectra, this COGS item includes a combined 4% downstream royalty to Sanofi and Glenridge Pharmaceuticals, as well as undisclosed finished product supply payments to Cangene and a fee to CSL Behring for potency testing.

Knowing that the downstream royalty accounts for four points of the 5.6% cost means that the most Questcor was paying to BioVectra was 1.6% of net Acthar sales; more realistically, to account for other supply fees too, it can be assumed that this figure was closer to 1%.

Now, using a 15% cost of capital, the NPV of a 1% manufacturing payaway on Acthar’s current consensus sales is just $27m. But to justify the $50m BioVectra price tag – let alone the additional $50m – Questcor must have assumed that the value of the fees under the current contract would have amounted to more than $50m; and this suggests that it thinks Acthar will generate sales twice as high as even the bullish consensus that analysts currently carry.

Major risk

There is of course another side to every purchase, and in this case it is hardly surprising that BioVectra’s owners agreed to sell. Perhaps they feared that their Acthar revenue stream was at risk of drying up – say, for instance, if last year’s problems derailed sales of the drug and hit Questcor, their most important customer.

Granted, from Questcor’s point of view there is more to BioVectra than just the Acthar API: the company also specialises in pegylation and conjugation chemistry and fermentation, for instance. But, as Questcor admits, “our ability to manage ... a business of which we have no previous experience” is a major risk.

It is one thing for sell-side analysts, whose banks rely on follow-on business with clients, to put increasingly bullish estimates into the market, but another entirely for the company itself to buy into this hype. The BioVectra acquisition shows that this is just what Questcor has done.

Protection around Acthar comprises copyright, trademarks, trade secrets and contractual provisions, but not patents. Considering the insurance problems, not to mention a pending US government investigation into Questcor’s promotional practices and the recent revelation that Cerium Pharmaceuticals had received US orphan drug status for a synthetic version of Acthar, Questcor’s expectations look like they have departed from reality.

Cautious investors would be well advised to check how the company’s implied Acthar forecasts tally with their own expectations.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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